Rodent pups exposed to hyperoxia develop lung changes similar to bronchopulmonary dysplasia (BPD) in extremely premature infants. Oxidative stress from hyperoxia can injure developing lungs through endoplasmic reticulum (ER) stress. Early caffeine treatment decreases the rate of BPD, but the mechanisms remain unclear. We hypothesized that caffeine attenuates hyperoxia-induced lung injury through its chemical chaperone property. Sprague-Dawley rat pups were raised either in 90% (hyperoxia) or 21% (normoxia) oxygen from postnatal day 1 (P1) to postnatal day 10 (P10) and then recovered in 21% oxygen until P21. Caffeine (20 mg/kg) or normal saline (control) was administered intraperitoneally daily starting from P2. Lungs were inflation fixed for histology or snap frozen for immunoblots. Blood caffeine levels were measured in treated pups at euthanasia and were found to be 18.4±4.9 μg/ml. Hyperoxia impaired alveolar formation, increased ER stress markers and downstream effectors; caffeine treatment attenuated these changes at P10. Caffeine also attenuated the hyperoxia-induced activation of cyclooxygenase-2 and markers of apoptosis. In conclusion, hyperoxia-induced alveolar growth impairment is, in part, mediated by ER stress. Early caffeine treatment protects developing lungs from hyperoxia-induced injury by attenuating ER stress.